Algorithms and the Changing Frontier

That is the title of a new paper that we recently uploaded to SSRN. The paper was prepared for an NBER conference on the changing frontier in science and innovation - a retrospective on the world since Vannevar Bush's seminal Science The Endless Frontier. The abstract:

We first summarize the dominant interpretations of the "frontier" in the United States and predecessor colonies over the past 400 years: agricultural (1610s-1880s), industrial (1890s-1930s), scientific (1940s-1980s), and algorithmic (1990s-present). We describe the difference between the algorithmic frontier and the scientific frontier. We then propose that the recent phenomenon referred to as "globalization" is actually better understood as the progression of the algorithmic frontier, as enabled by standards that in turn have facilitated the interoperability of firm-level production algorithms. We conclude by describing implications of the advance of the algorithmic frontier for scientific discovery and technological innovation.

The full paper is freely available at SSRN.

How the Peer-to-Peer Economy Expands Opportunity

Testimony by @auerswald at the House Committee on Small Business hearing on "The Power of Connection: Peer-to-Peer Businesses." Other speakers included Dr. Arun Sundararajan (NYU), Ms. Beth Stevens, Assistant General Counsel, Sidecar Technologies, Inc., and Mr. Alan Mond, CEO, 1000 Tools, Inc. - the latter two are examples of innovative startups shaping the "sharing" economy described so well in books like The Mesh" and "What's Mine is Yours." An excerpt from Auerswald's testimony:

In more general terms, the bottom line is this: shared prosperity requires not only innovations that scale-up to create new wealth but also innovations that scale-out to create new opportunities.

Let me be very clear on this point. Much of my own work, as well as important research conducted over the past decade at the Kauffman Foundation in Kansas City with which I have been affiliated, is about the value to society of scale-up innovation—particularly via new entrepreneurial entrants. This research has demonstrated that the small proportion of new ventures that scale-up rapidly are responsible for a disproportionate share of value creation in the economy.

But here’s the problem we’ve run into: while some scale-ups create a large number of new jobs, many do not. Companies like Apple, Google, Facebook, Instagram, and Twitter have all achieved valuations in the tens and even hundreds of billions of dollars, but they directly employ far fewer people per dollar of revenue than their Fortune 500 counterparts did a generation ago. This is where peer-to-peer platforms come into play. By their very structure, peer-to-peer platforms scale-out success to reach tens of thousands, even hundreds of thousands, of people with opportunities to create viable livelihoods for themselves. They create new and enticing invitations to latent producers within the economy to employ their individual assets and talents to create new economic value.

The significance of peer-to-peer business models thus is not effectively measured by adding up the share of GDP they represent in terms of monetized transactions. These innovations in work are rushing in at the fringes of the advanced economies to fill the void left behind as large corporations continue to “lean up”—that is, to shrink their payrolls by employing algorithms and machines to perform routine tasks previously performed by people. As Gansky puts it, “We’re in a period of exploration. While we might be looking at a relatively small magnitude of overall economic activity now in the peer-to-peer economy, it’s happening at a time when all the tried-and-true industries are going through significant transformations.” Steven Straus, former managing director of the Center for Economic Transformation at the New York City Economic Development Corporation, looks at the same phenomenon from the standpoint of service providers: “We currently have about three job seekers for every available job and 11 million people looking for work—so the growth of the sharing economy isn’t surprising.”

In the coming decades, the United States and other advanced industrialized economies will no sooner return to the routinized, manufacturing-centric economy of the 20th century than to the agrarian economy that preceded it. The issue is not whether new livelihoods based on peer-to-peer business models are better or worse than the Industrial Age jobs that are disappearing from large corporations. The real point is that when jobs are eliminated in the process of digital disruption, they will not be coming back in their old form. As that happens, we humans have no choice but to fall back on our fundamental social skill set: creating and sharing with one another. There is, however, one big difference: unlike our isolated ancestors of millennia past, Americans in this century are empowered by architectures of collaboration that allow for the creation of new and diverse livelihoods at unprecedented rates.

Therein lies the potential of today’s peer-to-peer economy.